PM Modi steps up economic reforms, eyes privatisation

People watch the results of Maharashtra state elections outside Bharatiya Janata Party (BJP) party office in Mumbai.

NEW DELHI - India promised on Monday to open up the coal industry to private players and moved closer to selling a stake in state-run Oil and Natural Gas Corp (ONGC), as Prime Minister Narendra Modi picked up the pace on economic reform days after relaxing fuel price controls.

Using an executive order, the cabinet agreed to allow private Indian companies to mine and sell coal at an unspecified future date, Finance Minister Arun Jaitley said. That sets the stage for the biggest liberalisation of the industry in more than 40 years.

The Bharatiya Janata Party's (BJP) success in the Maharashtra and Haryana state elections last week capped several days of action on the economic front and has given Modi more room to cut through a thicket of regulations and state controls he says holds back Asia's third-largest economy.

"Reform is the art of the possible," Jaitley earlier told TV network ET Now, hinting that more was to come. "In the first year, when people expect lot of reforms and there is lot of popular support behind the reform process, it is more easily possible.

Modi was elected in May on promises he would create jobs and rejuvenate the Indian economy, but investors and economists were disappointed by his first budget and a lack of early progress on fixing structural economic problems.

In the last week, he has gone some way towards quelling those concerns, putting in a reform-minded team at the finance ministry that includes prominent economist Arvind Subramanian to help formulate the budget and policy.

The economy is showing some signs of revival and inflation has plummeted, aided largely by a drop in global oil prices.

On Saturday, the cabinet freed diesel pricing of government intervention and raised the price the government pays producers of natural gas by a third to $5.61 per mmBtu.

Modi also begun an overhaul of creaky labour rules, cutting the power of labour inspectors and slashing the red tape for small companies that makes India one of the toughest places in the world to do business.

Indian shares, bonds and rupee currency all performed strongly on Monday in response to the new economic policies and the victories by the BJP in Maharashtra and Haryana.

UNDOING INDIRA

Former Prime Minister Indira Gandhi nationalised the coal industry in 1972, creating one of the world's largest mining companies, state-run Coal India.

The system was intended to provide steady supplies of fuel and help industrialisation, but Coal India is now deeply dysfunctional. Most of India's electricity is generated by coal, but long power cuts are the norm in much of the country, which has the world's fifth-largest coal reserves but is the world's third largest importer.

As of Wednesday, 64 out of 103 power stations had coal for less than a week, mainly due to a shortfall in supplies from Coal India, according to the power ministry.

Private companies are already allowed to mine supplies for their own power plants and other industrial projects, and Coal India hires some private firms to operate mines. But until now private companies have not been permitted to sell coal.

"This would lead to an optimum utilization of the national resource," Jaitley told reporters, adding that there was no move to fully privatize Coal India.

However, the government does plan to sell 10 per cent of its majority holding in the inefficient behemoth, which is plagued by corruption. Unions oppose the sale.

The Supreme Court last month scrapped the licences for 214 coal fields that supplied power, cement and other companies over allegations of graft. Monday's decision to liberalise the coal industry was tacked onto an executive order to allow the auction of the scrapped coal fields.

The executive order, known as an ordinance, takes immediate effect but must be approved by parliament within a few months. Modi's government will have to win cross-party support for its plan, since it does not have a majority in Rajya Sabha.

SELLING STAKES TO PAY THE BILLS

The moves on diesel and gas make the state-run ONGC more attractive to investors by reducing the hefty discount on crude oil sales that the country's top oil producer must give to fuel retailers.

On Monday, the administration's top privatisation official met bankers in Mumbai to discuss the sale of a 5 per cent stake in ONGC, a top finance ministry official said.

Shares in ONGC, the second-largest listed firm in India by market value, gained 5.6 per cent on Monday. The government has a stake of 68.94 per cent in the company, which has shares in oil and gas fields across the globe.

The finance ministry hopes to raise up to $3 billion from the ONGC sale, almost a quarter of its target for asset sales for this financial year.

Citigroup and HSBC are among five banks chosen to manage the planned sale of a stake in ONGC, sources told Reuters in August.

The ONGC share sale was likely to be held in the first half of November, two people directly involved with the transaction said on Monday. The pre-sale marketing roadshows for the offering are expected to be completed by the first week of the month, they said.

A top finance ministry official, who declined to be identified because of the sensitivity of the topic, also told reporters the government wanted to pass a bill in parliament's next session to free up foreign investment in the insurance industry.

In his maiden budget in July, Jaitley set a target of 584.25 billion rupees to be raised by the sale of shares in state-run companies and minority stakes in private companies. Another major planned sale is of a 10 per cent stake in giant Coal India.

The income is key to meeting a challenging goal of a fiscal deficit of 4.1 per cent of gross domestic product for the year ending March 31. Tax revenue has been less than budgeted this year, and government finances have been stung by a large bill for tax rebates.

One restraint on Modi's government is his small bench of ministers, many holding multiple portfolios. Jaitley, for example, doubles as defence minister. The Information and Broadcasting Minister Prakash Javadekar, who also acts as environment minister, last week suggested that an expansion of the cabinet was imminent.